Bank of the Future

The ongoing COVID-19 pandemic has led to social distancing and lockdowns worldwide, forcing many businesses to shut shop albeit temporarily. Coupled with a drop in consumer spending, the impact of COVID-19 on SMEs has been especially deep. Discretionary categories like restaurants, entertainment, apparel and retail are likely to see revenues evaporate as middle- and lower-income households re-prioritize their spending towards essentials like food and groceries. Wealthier households have typically picked up some of the slack in previous crises, but this time even they are confined to their homes.

This spending freeze will push many otherwise healthy businesses into financial difficulties as cash flows dry up. A drop in variable costs (e.g.: purchases of supplies, salaries for laid off staff) may offset this to some extent, but cash outflows for salaries, rents, utility bills will remain. Some generous landlords may offer rent moratoriums, but many who depend on rental income will not have the same luxury.

One estimate for the UK projects that under such trying circumstances, one-fifth of SMEs will collapse within a month. Thankfully, governments and central banks seem to have learnt the right lessons from the financial crisis of 2008 and have responded aggressively by enacting stimulus packages to insulate banks with heavy exposure to SME financing.

For example:

The US Government’s Coronavirus Aid, Relief, and Economic Security (CARES) Act provides emergency grants as well as relief for existing loans. Additionally, under the USD 349 billion Paycheck Protection Program, the US Small Business Administration will support forgivable loans up to 2.5x the monthly average payroll amount to SMEs with under 500 employees, in lieu of producing proof of wage, benefits and utility payments.

The UK Government has unveiled its Coronavirus Business Interruption Loan Scheme, offering government guarantees to banks on loans to SMEs impacted by COVID-19. Lenders will be barred from stipulating personal guarantees on loans up to GBP 250,000. To reduce compliance costs, SMEs will be allowed to self-certify the impact from COVID-19. The government is also providing direct cash grants to high street SMEs.

Despite these packages and the relaxed terms available, some small businesses have turned risk-averse and are anxious about taking on additional financial burdens at this time. Here’s what we think can be done to help alleviate these anxieties some more:

Interest free or Interest deferred loans for a few months, structured in a way that compensates banks for interest income foregone through marginally higher interest rates once the crisis passes. Principal moratoriums and balloon repayment structures will also be meaningful in reducing immediate financial outgoes.

Moratorium on NPA recognition: The period of delinquency after which a loan is recognized as a Non-Performing Asset may be temporarily extended from 90 to 180 days, with reporting to credit bureaus in abeyance.

Allowing rollover of existing small business loans into new loans under the newly established programs.

Waiver of existing loans for businesses in especially vulnerable sectors.

Allowing fintechs and alternative lenders to participate in government lending programs. This will help leverage their rapid turnaround times, and the ability to reach traditionally under-served segments.

Temporary credit score protection to SME owners: Owners of defaulting SMEs who have personally guaranteed their loans need forbearance from red flags on their credit reports by banks. Such flags can impact subsequent business ventures and choke post-crisis economic activity.

Providing tax incentives to large businesses to encourage them to lengthen credit periods provided to their small business customers and reducing payment periods to their suppliers. Large businesses, especially in consumer-packaged goods and healthcare have seen a relatively milder impact from the crisis and are well placed to do so. This will reduce cash flow gaps for SMEs and help them service their bank loans.

Low cost funding windows established by central banks to be used strictly for on-lending to SMEs.

SMEs that survive this crisis will emerge stronger and more resilient. While those that don’t will be enriched by the experience and we believe will be well placed for future success. Government interventions and support from the banks will help these acorns to be nurtured into the large oak trees of the future.

Vivek Iyer is a Functional Consultant with the Banking and Financial Services (BFS) business unit at Tata Consultancy Services (TCS). He has around 13 years of experience with expertise in the commercial and consumer lending space, and focuses on industry advisory, thought leadership and solution conceptualization activities. Prior to joining TCS, Vivek worked with leading multinational banks in commercial lending, and in product development for Oracle's Flexcube suite of financial solutions. Vivek holds an MBA in Finance and Corporate Strategy from the Indian Institute of Management, Indore, India, and a bachelor’s degree in computer engineering from the University of Pune, India.

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